Journal
AMERICAN JOURNAL OF AGRICULTURAL ECONOMICS
Volume 82, Issue 4, Pages 881-896Publisher
BLACKWELL PUBLISHERS
DOI: 10.1111/0002-9092.00088
Keywords
commodity and freight futures; multiple risk; multivariate GARCH
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Commodity and freight futures contracts are analyzed for their effectiveness in reducing uncertainty for international traders. A theoretical model is developed for a trader exposed to several types of risk. OLS hedge ratio estimation is compared to the SUR and the multivariate GARCH methodologies. Explicit modeling of the time-variation in hedge ratios via the multivariate GARCH methodology, using all derivatives, and taking into account dependencies between prices, results in reductions in risk, even after accounting for transaction costs. Results confirm that while the commodity futures contracts are important for hedging risk, freight futures are a useful mechanism for reducing risk.
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